Random House and Penguin Merger Creates Global Giant

PARIS — The book publishing industry is starting to get smaller in order to get stronger.

The announcement on Monday that Random House and Penguin would merge narrows the business to a handful of big publishers, and could set off a long-expected round of consolidation as the industry adapts to the digital marketplace.

John Makinson, the chief executive of Penguin who will serve as chairman of the new company, said that with consolidation inevitable, “we decided it was better to get in early rather than be a follower.”

In announcing the agreement, the European owners of Random House and Penguin — Bertelsmann and Pearson, respectively — said Bertelsmann would control 53 percent of the combined entity and Pearson 47 percent. In a statement, Bertelsmann said the deal would most likely conclude in the second half of 2013, after approval from regulators.

The merger will create the largest consumer book publisher in the world, with a global market share of more than 25 percent and a book list that includes contemporary best-sellers like Random House’s “Fifty Shades of Grey” and Penguin’s backlist of classics from authors like George Orwell.

The deal, analysts said, would give the new company, to be called Penguin Random House, greater scale to deal with the challenges arising from the growth of electronic books and the power of Internet retailers. Publishers are increasingly worried about the leverage wielded by Internet giants like Google, Apple and, especially, Amazon. These companies have vast resources to invest in new technology, like digital sales platforms, and the size to let them negotiate better terms on prices.

Facing those challenges, the major publishers have been expected to join together, getting smaller in number and bigger in size. The other four houses among the so-called Big Six are also owned by larger media conglomerates: HarperCollins, which is part of News Corporation; Macmillan, owned by Georg von Holtzbrinck of Germany; Hachette, whose parent company is Lagardère of France; and Simon & Schuster, a division of CBS. They could all now face increased pressure to consolidate in response to a combined Penguin Random House.

“I wouldn’t be surprised if all the major trade publishers were having conversations like this,” said Ned May, an analyst at Outsell, a research firm. “I would expect to see similar realignment.”

HarperCollins has already signaled its interest in consolidation. News Corporation approached Pearson informally over the weekend to explore its own bid for Penguin, and that interest sped up what was already an expedited process with Random House, said one executive briefed on the negotiations. Now that Penguin is out of the picture, News Corporation will most likely be looking for a new partner for HarperCollins.

Analysts also said there could be matchups between large publishing houses and smaller, independent ones.

The deal must still be approved by regulators in the United States and Europe. But if it is completed and further consolidation occurs, midsize companies in the crowded field of mass-market book publishing might find it especially difficult to compete, because the bigger publishers will be able to extract favorable terms from customers or to invest in digital operations. Small publishers with a niche focus and loyal groups of authors and readers might manage to remain independent, said Douglas McCabe, an analyst at Enders Analysis in London.

The combination announced Monday is the first major publishing industry merger since Bertelsmann paid more than $1 billion for Random House in 1998. James L. McQuivey, a media analyst at Forrester Research, said that as far as gaining regulatory approval, Random House and Penguin should benefit from being the first of the major publishers to merge. “It’s easier to argue that the industry going from six to five publishing houses won’t change the market, than arguing that going from five to four players won’t impact competition,” he said.

“Regulators generally understand that these companies aren’t just competing with each other, they’re competing with a very changed marketplace,” he added.

One person briefed on the talks said Pearson had considered all options for Penguin, including an outright sale. But a sale would have been difficult, this person said, because it would have prompted prohibitively high capital gains taxes in the United States.

Under the agreement, Markus Dohle of Random House will be chief executive of the new entity, which would have annual revenue of about $3.8 billion. In a phone interview Mr. Dohle said he expected Penguin Random House to be able to cut costs in areas like supply chain distribution. “The goal of the new company is not about cost efficiency, but about efficiency in better services,” he said. “But together we have a bigger physical footprint so of course that helps get the physical cost-per-copy down.”

Marjorie Scardino, chief executive of Pearson, also said that cost-saving synergies were not the primary motivation for the deal. She said the combination would help Penguin Random House “invest in books and in new ways of deploying them.” This could include digital platforms for selling books directly to consumers, she said, as well as new digital formats.

“There are a lot of things changing with reading, and a lot of things that are going to happen that don’t happen now,” she said.

The combined company is expected to invest heavily in e-books and what Mr. Dohle called digital product development. He said that did not necessarily mean it would produce its own e-reader device, as some in the industry expected.

Thomas Rabe, chief executive of Bertelsmann, said in an interview that the merger would also allow the combined company to invest more in emerging markets, which show more promise for growth than developed markets like the United States and Western Europe.

Authors and literary agents, one step removed from the merger, have expressed concern about consolidation, fearing that they will lose leverage if there are fewer publishers. Blake Bailey, the author of literary biographies of Richard Yates and John Cheever, reflected this unease, saying: “Having just gone through an auction with my Philip Roth biography, I think it’s usually true that an author benefits when there are as many big players as possible bidding against each other.”

In an apparent effort to ease those concerns, Mr. Dohle on Monday sent letters to the author, agent and bookselling communities, seeking to reassure them how much a combined Penguin Random House would value them. “For us, separately and in partnership, it is and always will be about the books. Your books,” Mr. Dohle wrote in the message.

He said in the phone interview that the merger would not result in closing redundant imprints and less editorial independence. “The idea of this company is to combine the small company culture and the small company feeling on the creative and content side with the richest and most enhanced access to services on the corporate side,” Mr. Dohle said.

A version of this article appears in print on October 30, 2012, on Page B1 of the New York edition with the headline: Random House And Penguin Merger Creates Global Giant. Order Reprints|Today's Paper|Subscribe